Guaranty agreements have been a part of loan transactions dating back to ancient times. So have defenses to guaranties. As early as 300 B.C., Demosthenes, an ancient Athenian orator, in Orations 35, Against Lacritus (Loeb Classical Library (loebclassics.com)), described a loan made by Androcles to Artemon that was purportedly guaranteed by Artemon’s brother, Lacritus. When Androcles sought payment from Lacritus on the guaranty, Lacritus, as a defense, denied he had guaranteed the loan. What followed were long arguments from each side, foreshadowing the battles between lenders and guarantors that have continued for centuries. As a result, guaranty agreements have evolved to include an ever-growing list of waivers of defenses by the guarantor.
Certain defenses can in fact be waived, but which ones and how those waivers must be cast to be effective has also been the source of much controversy. At issue in Hovde v. ISLA Development LLC, 51 F.4th 771 (7th Cir. 2022), a recent case before the U.S. Court of Appeals for the Seventh Circuit, was whether a guarantor had waived the statute of limitations as a defense to payment under his guaranty. In an October 2022 decision, the appeals court affirmed the lower court ruling that the lenders could not enforce the guaranty because the statute of limitations had in fact not been effectively waived. However, the courts had different rationales for their conclusions. The lower court found the waiver was not sufficiently explicit. But the appeals court held that the waiver as written, even if found to be explicit, waived only defenses relating to conditions to payment. In an interesting, if nuanced, distinction, it held that the statute of limitations was not a defense relating to a condition to payment. Rather, it was a defense relating to enforcement of the guaranteed obligation. Accordingly, the waiver had to relate to the enforceability of the guaranteed obligation to be effective as to the statute of limitations.
